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Post Reply: Trusts vs. Companies in Kenya: A Comprehensive Comparison

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	In Kenya, individuals and entities seeking to manage assets, plan estates, or conduct business face the choice between establishing a trust or a company. Both are recognized legal structures under Kenyan law, but they differ significantly in structure, purpose, benefits, costs, and registration procedures. This article provides a detailed comparison of trusts and companies, highlighting their differences, advantages, and procedural requirements, with a focus on practical considerations for choosing the appropriate structure.
<h3>What is a Trust?</h3>
A trust is a fiduciary arrangement where a settlor transfers legal ownership of assets to a trustee, who manages them for the benefit of designated beneficiaries. Trusts in Kenya are primarily governed by the Trustees (Perpetual Succession) Act (Cap 164), the Trustee Act (Cap 167), and the Registration of Documents Act (Cap 285), with tax provisions under the Income Tax Act and Tax Procedures Act. Trusts can be unincorporated (simple trusts) or incorporated under Cap 164, gaining separate legal personality upon registration with the Business Registration Service (BRS). They are commonly used for estate planning, asset protection, tax planning, or charitable purposes.
<h3>What is a Company?</h3>
A company is a legal entity formed under the Companies Act, 2015 (No. 17 of 2015), designed for commercial activities. It has a separate legal personality, enabling it to own assets, enter contracts, sue, or be sued independently. Companies can be private (limited by shares or guarantee) or public, with private companies limited by shares being the most common for business purposes. Shareholders own the company, while directors manage its operations, and it is registered with the BRS.
<h3>Key Structural Differences</h3>
<table>
<tbody>
<tr>
<td width="114">Feature</td>
<td width="228">Trust</td>
<td width="259">Company</td>
</tr>
<tr>
<td width="114">Legal 
Framework</td>
<td width="228">Trustees (Perpetual Succession) Act (Cap 164), Trustee Act (Cap 167)</td>
<td width="259">Companies Act, 2015 (No. 17 of 2015)
&nbsp;</td>
</tr>
<tr>
<td width="114">Purpose</td>
<td width="228">Asset protection, succession planning, charity</td>
<td width="259">Business operations, profit generation</td>
</tr>
<tr>
<td width="114">Legal 
Personality</td>
<td width="228">No separate legal entity unless incorporated under Cap 164</td>
<td width="259">Separate legal entity from inception</td>
</tr>
<tr>
<td width="114">Ownership</td>
<td width="228">Beneficiaries hold beneficial interest, not direct ownership</td>
<td width="259">Shareholders are the actual owners via shares</td>
</tr>
<tr>
<td width="114">Management</td>
<td width="228">Managed by trustees under a trust deed</td>
<td width="259">Managed by directors on behalf of shareholders</td>
</tr>
<tr>
<td width="114">Lifespan</td>
<td width="228">Can be perpetual if incorporated under Cap 164; otherwise, per trust deed</td>
<td width="259">Perpetual unless wound up or struck off</td>
</tr>
<tr>
<td width="114">Disclosure</td>
<td width="228">Low - trust deeds are not public; no mandatory public filings</td>
<td width="259">High - annual returns, accounts, and shareholder details are public</td>
</tr>
<tr>
<td width="114">Regulatory 
Body</td>
<td width="228">Attorney General/Registrar of Documents (for Cap 164 trusts); BRS</td>
<td width="259">Business Registration Service (BRS)</td>
</tr>
<tr>
<td width="114">Taxation</td>
<td width="228">Exemptions for registered family trusts; beneficiaries taxed on distributions</td>
<td width="259">Corporate tax (30% or 25% for small businesses); dividends taxed (5% or 15%)</td>
</tr>
</tbody>
</table>
<h3>Detailed Differences</h3>
<ol>
<li>Legal Structure and Purpose
<ul>
<li>Trust: A trust is a relationship, not a legal entity, unless incorporated under Cap 164. It is designed for non-commercial purposes like wealth preservation, succession planning, or charitable activities. The trust deed governs trustee powers and beneficiary rights.</li>
<li>Company: A company is a distinct legal entity created for profit-making activities such as trading or investment. It operates under a memorandum and articles of association, focusing on generating shareholder returns.</li>
</ul>
</li>
<li>Ownership and Control
<ul>
<li>Trust: The settlor transfers assets to the trustee, who holds legal title and manages them for beneficiaries. Beneficiaries have beneficial interest but no direct control unless specified in the trust deed.</li>
<li>Company: Shareholders own the company through shares, while directors manage operations. Shareholders influence major decisions (e.g., via voting), but daily control rests with directors.</li>
</ul>
</li>
<li>Legal Personality
<ul>
<li>Trust: Unincorporated trusts lack separate legal personality; trustees hold assets in their names. Incorporated trusts under Cap 164 become bodies corporate, capable of owning property and contracting independently.</li>
<li>Company: A company has separate legal personality from inception, shielding shareholders from direct liability.</li>
</ul>
</li>
<li>Taxation
<ul>
<li>Trust: Registered family trusts enjoy tax exemptions under the Income Tax Act and Finance Act, 2021, including no stamp duty on asset transfers and income tax exemptions for trust income. Beneficiaries are taxed on distributions at their individual rates, enabling tax optimization.</li>
<li>Company: Companies face a corporate tax rate of 30% (or 25% for resident companies with turnover below Kshs 50 million). Dividends are subject to withholding tax (5% for residents, 15% for non-residents). No capital gains tax (CGT) exemptions apply, unlike trusts.</li>
</ul>
</li>
<li>Liability
<ul>
<li>Trust: Trustees are personally liable for breaches of fiduciary duty but not for trust debts unless reckless. Beneficiaries are protected, as trust assets are separate from their personal estates.</li>
<li>Company: Shareholders’ liability is limited to their share capital, protecting personal assets. Directors are liable only for fraudulent or reckless conduct.</li>
</ul>
</li>
<li>Regulatory Requirements
<ul>
<li>Trust: Unincorporated trusts require trust deed registration under Cap 285, while incorporated trusts need BRS registration and Attorney General approval. Compliance is minimal, with no mandatory annual filings unless tax-related.</li>
<li>Company: Companies face stricter requirements, including annual general meetings, BRS filings, statutory registers, and audits (for companies exceeding financial thresholds).</li>
</ul>
</li>
<li>Continuity
<ul>
<li>Trust: Incorporated trusts have perpetual succession under Cap 164. Unincorporated trusts’ duration depends on the trust deed, subject to the Perpetuities and Accumulations Act.</li>
<li>Company: Companies have perpetual succession unless dissolved, allowing seamless share transfers.</li>
</ul>
</li>
</ol>
<h3>Benefits of Trusts Over Companies</h3>
<ol>
<li>Privacy: Trusts offer confidentiality, as trust deeds and beneficiary details are not publicly disclosed, unlike company records accessible via the BRS.</li>
<li>Estate and Succession Planning: Trusts bypass probate, avoiding delays and costs seen in cases like the Mbiyu Koinange estate dispute, ensuring efficient wealth transfer across generations.</li>
<li>Asset Protection: Trust assets are shielded from creditors, legal claims, or matrimonial disputes, as they are no longer part of the settlor’s estate.</li>
<li>Tax Efficiency: Registered family trusts benefit from stamp duty and income tax exemptions, reducing tax liabilities compared to companies’ corporate and dividend taxes.</li>
<li>Charitable Flexibility: Trusts are ideal for philanthropic ventures or NGOs, with perpetual succession under Cap 164 for long-term charitable goals.</li>
<li>Generational Wealth Control: Trusts allow structured distributions (e.g., income at specific ages), unlike companies, where share transfers may incur taxes.</li>
</ol>
<h3>Benefits of Companies Over Trusts</h3>
<ol>
<li>Commercial Flexibility: Companies are designed for trading, investment, and profit-making, unlike trusts, which are restricted from direct commercial activities.</li>
<li>Limited Liability: Shareholders’ personal assets are protected, limited to their investment, making companies safer for high-risk ventures.</li>
<li>Fundraising and Expansion: Companies can issue shares to attract investors, facilitating growth, unlike trusts, which cannot raise equity.</li>
<li>Formal Governance: The Companies Act provides structured governance, enhancing accountability and appeal to investors, banks, and regulators.</li>
<li>Credibility: Companies are widely recognized as business entities, boosting credibility for contracts, tenders, or partnerships.</li>
<li>Transferability: Shares are easily transferable, enabling seamless ownership changes compared to trust assets, which depend on the trust deed.</li>
</ol>
<h3>Registration Procedures</h3>
Trust Registration
<ul>
<li>Draft Trust Deed: A legal expert drafts a trust deed outlining the trust’s name, objectives, trustee powers, beneficiaries, and assets. The deed is signed and commissioned by a Commissioner for Oaths.</li>
<li>Name Reservation: Submit the proposed name to the Registrar of Documents or BRS for approval.</li>
<li>Stamp Duty Payment: Lodge the trust deed at the Lands Registry for stamp duty assessment (1-4% of asset value).</li>
<li>Document Submission: For unincorporated trusts, register the deed under Cap 285. For incorporated trusts under Cap 164, submit to the BRS (<a href="https://manual.brs.go.ke">https://manual.brs.go.ke</a>) with:
<ul>
<li>Form TR1 (application for incorporation).</li>
<li>Certified copies of IDs, KRA PINs, and passport photos of settlor, trustees, and beneficiaries.</li>
<li>Statement of initial trust assets.</li>
<li>Trust deed or constitution.</li>
<li>Minutes appointing trustees.</li>
<li>Financial statement or bank statement of a trustee.</li>
<li>Curriculum vitae of trustees.</li>
<li>Diagrammatic representation of the common seal.</li>
<li>Summary of the trust (max one page).</li>
</ul>
</li>
<li>Attorney General Approval and Gazettement: Incorporated trusts require Attorney General consent and publication in the Kenya Gazette.</li>
<li>Certificate of Incorporation: Issued by the BRS for incorporated trusts (60-90 days).</li>
<li>Tax Compliance: Register with KRA for a PIN if required and file tax returns to maintain exemptions.</li>
<li>Timeline: 1-3 weeks for unincorporated trusts; 3-6 months for incorporated trusts due to gazettement.</li>
</ul>
Company Registration
<ol>
<li>Name Search and Reservation: Conduct a name search via the BRS eCitizen portal (<a href="https://ecitizen.go.ke">https://ecitizen.go.ke</a>) and reserve the name.</li>
<li>Prepare and submit the following documents:
<ul>
<li>Form CR1 (application for registration).</li>
<li>Memorandum and Articles of Association.</li>
<li>Statement of nominal capital.</li>
<li>Copies of IDs, KRA PINs, and passport photos of directors and shareholders.</li>
</ul>
</li>
<li>File with BRS: Upload documents via the eCitizen portal and pay registration fees.</li>
<li>Certificate of Incorporation: Issued within 2-5 working days.</li>
<li>Tax Registration: Obtain a KRA PIN and register for applicable taxes (e.g., VAT, PAYE).</li>
<li>Additional Licenses: Secure sector-specific licenses (e.g., county permits).</li>
<li>Bank Account: Open a company account with the certificate and board resolutions.</li>
<li>Timeline: 1-2 weeks, assuming efficient BRS processing.</li>
</ol>
<h3>Choosing Between a Trust and a Company</h3>
<table>
<tbody>
<tr>
<td width="114">Use Case</td>
<td width="228">Best Option</td>
<td width="259">Reason</td>
</tr>
<tr>
<td width="114">Running a business</td>
<td width="228">Company</td>
<td width="259">Easier to raise capital, enter contracts, and grow</td>
</tr>
<tr>
<td width="114">Managing family wealth</td>
<td width="228">Trust</td>
<td width="259">Protects assets, avoids probate, and offers tax exemptions</td>
</tr>
<tr>
<td width="114">Setting up a charity/foundation</td>
<td width="228">Trust (Cap 164)</td>
<td width="259">Strong framework for perpetual charitable activities</td>
</tr>
<tr>
<td width="114">Seeking anonymity</td>
<td width="228">Trust</td>
<td width="259">No public register or mandatory filings</td>
</tr>
<tr>
<td width="114">Need for formal governance</td>
<td width="228">Company</td>
<td width="259">Structured governance under the Companies Act enhances credibility</td>
</tr>
</tbody>
</table>
<h3>Challenges and Limitations</h3>
Trusts
<ul>
<li>Complexity: Drafting and managing trusts requires legal expertise; errors can lead to disputes or tax issues.</li>
<li>Costs: Initial setup (legal fees, stamp duty) and ongoing trustee fees can be significant, though offset by tax benefits.</li>
<li>Limited Commercial Use: Trusts cannot engage in direct business activities, restricting their scope.</li>
</ul>
Companies
<ul>
<li>Regulatory Burden: Annual filings, audits (if applicable), and governance requirements increase compliance costs.</li>
<li>Taxation: Higher tax obligations (corporate tax, dividend tax) compared to trusts’ exemptions.</li>
<li>Public Disclosure: Shareholder and financial details are publicly accessible, reducing privacy.</li>
</ul>
<h3>Conclusion</h3>
In Kenya, trusts and companies serve distinct purposes, each with unique advantages. Trusts are ideal for estate planning, asset protection, privacy, and charitable goals, offering tax exemptions and probate avoidance. Companies excel in commercial activities, providing limited liability, fundraising flexibility, and formal governance, though with higher regulatory and tax burdens.
Trust registration, while potentially slower (3-6 months for incorporated trusts), involves lower ongoing compliance and significant tax benefits. Company registration is faster (1-2 weeks) but requires continuous filings and higher taxes.
Choosing the right structure depends on your goals - business growth favours companies, while wealth preservation or philanthropy suits trusts. Consult legal and financial advisors to ensure compliance with Kenyan laws and alignment with your objectives.
Contact us today at +254 716 808 104 or <a href="mailto:info@lawguide.co.ke">info@lawguide.co.ke</a> for expert advice.
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